For some weeks now I had been mulling a diary about the inevitable market attack on France, but today's events force me to write now or forever hold my peace. Things are happening so fast, today's planned diary may be tomorrow's outdated analysis.

Societe Generale shares slumped as much as 23 percent and were down 16 percent at 21.89 euros at 4:27 p.m. in Paris. Credit-default swaps on the bank rose 29 basis points to a record 299 basis points.

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Bank shares lost 5.3 percent, for the biggest decline among the 19 industry groups in the Stoxx Europe 600 Index and the steepest drop since May 2009. French and Italian banks led the retreat. BNP Paribas (BNP) SA shed 11 percent to 35.06 euros and Credit Agricole SA (ACA) sank 15 percent to 5.82 euros.

"If credit default swaps on France are under attack, that's not a good sign," said Yves Marcais, a sales trader at Global Equities in Paris. "That means that France is under attack and that's worrisome. French banks hold a lot of French bonds."

It's unclear what exactly caused the crash. What's ironic is that the attack on the French banks appeared to get under way a couple of hours after Sarkozy rode into Paris in his shining armor to reassure the markets:

French President Nicolas Sarkozy cut short his vacation and promised to pare down huge debts after growing fears it could be the next triple A-rated economy to suffer a downgrade sent bank shares tumbling.

I seem to recall it was before and not after but that's not too important now.

Societe Generale shares dropped as mush as 20pc, leading credit ratings agencies Fitch and Moody's to reiterate the eurozone nation's top rating, a day after Standard & Poor's had done the same.

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Mr Sarkozy, who along with other European leaders has come under criticism for staying on holiday as the markets were gripped by fear, cut short his vacation on the French Riviera to summon key government ministers for an emergency meeting on the financial crisis.

No new measures were announced, but Mr Sarkozy insisted that "commitments to reducing the deficit are inviolable and will be maintained".

"There is only one sovereign in Europe, and that is Germany," said Stuart Thomson, who helps oversee about $120 billion as a portfolio manager at Ignis Asset Management in Glasgow. "Everything else is a credit and trades like a credit, even France."

Below the fold, the reasons why a market attack was entirely foreseeable, even if I doubt anyone expected it to happen so soon.

The EFSF has to source over 50% of its operating capital from "the markets" by issuing bonds backed by guarantees from Euro member states.

The EFSF is the "European Financial Stability Fund", the monster the EU created at the end of the Spring of 2010 in order to pretend to do something about the Greek debt crisis.

As member states get thrown under the bus they switch from guarantors of EFSF bonds to borrowers of EFSF funds.

Currently Spain and Italy are the marginal guarantors of the EFSF, and they are "under attack" by "the markets". Italy has suggested that it may exercise its option under the EFSF rules to withdraw its guarantee if its borrowing costs exceed those of Greece. The recent EU agreement allegedly lowered Greece's EFSF interest rate, while completely ignoring the fact that italy was, indeed, "under market attack".

In addition, France's AAA rating has become the subject of French Presidential Election Campaign Football, so whether France can continue to guarantee the EFSF's AAA rating is an open question, even if France continues to enjoy access to bond markets at reasonable rates.

There is a very good and detailed explanation of how the EFSF is badly designed in Yanis Varoufakis' blog: Why Italy? Why Spain? And why the EFSF's size does not matter from August 4. Varoufakis lays out the reasons why the EFSF is actually a mechanism for cascading crisis, not an effective ringfence around the already fallen Euro countries.

The creation of the EFSF was forced upon Europe by the eruption of the Crisis. Once Germany accepted that the periphery's fall would signal the eurozone's end, the search was on for a funding body that would extend loans to the `fallen' albeit without jeopardising the principle of perfectly separable debts (PSDs). PSD means one thing: Each euro of public eurozone debt, including that incurred to bail out the `fallen', must be assigned to one and only one member-state. In practice, it meant that, to remain faithful to the PSD principle, each EFSF-issued bond contained sliced or tranches of debt and each one of these was the liability of a single eurozone member-state `donor'.

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Germany and the rest of the surplus countries were hoping that the loan guarantees that they were offering to the EFSF would never need to turn into actual cash transactions. This would, indeed, be so if the EFSF had a coherent structure: its very institution would have averted speculative games by market traders and German taxpayers would never have had to cough up the euros associated with the loan guarantees to the EFSF. But, with the toxic α(F) inside the EFSF's foundations, markets recognise the shape of the cross diagram above. And nothing pleases them more than an opportunity to bet against an official's incredible threat, promise or prediction. If only for this reason, it was insanity personified to imagine that the α(F) curve might turn out slight enough to help contain the contagion. In short, our leaders ought to have known better.

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why are Europe's leaders so committed to the current structure of the EFSF? You may, dear reader, logically conclude that one of two explanations hold: Either my argument here is false or our leaders are irrational. Yet the truth is a little more complicated than that and, therefore, a third explanation may be best: My argument is right and our leaders are rational, albeit in a narrow sense of the word. Put differently, their commitment to the awful EFSF reflects a most peculiar form of rational idiocy. My next post will show what this means and how it is possible that idiocy is reinforced, at a pan-European level, by this narrow form of rationality.

Anyway, in case you missed the reasons why I said "France's AAA rating has become the subject of French Presidential Election Campaign Football", let me point you to this from last June 28

Nicolas Sarkozy warned a Socialist victory at next year's presidential elections would lead to a "debt explosion" in France and jeopardize the country's obligation to get its deficit below the 3 % threshold by 2013, Les Echos report. In a separate interview with Les Echos the former Socialist European minister Pierre Moscovici affirms that in case of his party's victory the Socialists "would have to respect the promises made to the French and the European partners as regards the reestablishment of the public finances towards the EU and its European partners". Moscovici said it was entirely out of question to see "France's rating by downgraded by the rating agencies".

“We have to balance the public accounts without delay”and cut the deficit to 3 percent of gross domestic product by 2013, Francois Hollande, the leading contender to become the Socialist candidate for president, said in an interview with today’s Le Monde newspaper. “Debt is the enemy of the left and of France.”

Martine Aubry, who’s also seeking her party’s nomination, echoed that view. “It’s a question of sovereignty,” she said today, also promising to meet the 3 percent goal. “Nothing would be worse than becoming president in 2012 and being attacked by financial markets,” she said on Europe 1 radio from Avignon, France.

It's poignant. It's almost as if she's doing it on purpose, but sadly she probably doesn't even realise what that sounds like to a bond trader.

The remarks suggest a shift from April, when the Socialist Party laid out its campaign platform for the 2012 election and avoided a firm commitment on the deficit. Since then, concern about the ability of euro-area nations to repay their debts has increased, with borrowing costs surging last week for Italy, the region’s third-largest economy.

This is all that the Markets need to hear - France's politicians have explicitly and publicly made themselves a target. At that point, the precise details of when France would be attacked, or the excuse or rumour that would trigger the attack, are not all that important. In fact, what's interesting is that France may well be an easier target than, say, Italy or Spain, because all the attack needs to achieve to succeed is a downgrade of France from its AAA rating, not a full-on default or the need to tap the EFSF, which would be the much harder goal of a market attack on Italy or Spain.

Anyway, if France is downrated the AAA rating of the EFSF, which is the result of the sovereign guarantees provided by EU member states, will be in question. At that point, it's quite possible Germany will simply bail itself out in disgust at its European partners, including France.

It's my impression Denmark got caught-up with the German Post WW2 "don't do anything stupid domestically" because of the key decision to protect the DM. The Danish economy was - is? - so tied to the German economy it's similar to the Canadian/US economic relationship. Effectively, then, German internal economic policy became, willy-nilly, Danish economic reality.

?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Short answer: No. That was actually a contentious political decision at the time, although this fact has been airbrushed from the official version of history.

Slightly longer answer: Denmark joined Bretton Woods, just like the rest of The WestTM. When Bretton Woods crashed, we tried to maintain a D-Mark peg, but had a decade of regular devaluations against it.

Of course devaluing and then attempting to defend the new exchange rate is just asking to be attacked. What we should have done was to float our currency. What we did instead was elect a right-wing economic hit man who enforced the D-Mark peg to the exclusion of all sensible macroeconomic concerns. Right on cue, this caused our productive economy to crater and the FIRE sector to blow a huge bubble all over the first half of the 1980s.

Somehow the 1980 decision to go for broke on the peg rather than abandon it has been anointed as the greatest act of wisdom in recent Danish economic history - rather than the gross act of irresponsible industrial sabotage it actually was.

Sounds like the defence Sweden put up for the ERM/Ecu-peg (or whatever it was called) in the early 90's. The Riksbank jacked interest rates up to 500 % (yes, really) before it conceded defeat and let the krona float. Madness, but at least and unlike in Denmark, everyone in Sweden nowadays agrees that the peg was insane.

The Bundesbank with its commitment to price stability had refused to lower interest rates massively. The partner countries are forcibly reminded of their responsibility for their currencies; the process of convergence needed for monetary union is strengthened.

The problem for Denmark was that the decision to defend the peg was made at the time Europe was coming out of the oil crisis, and the defence was supported by the full force of hitman fiscal policy. Which meant that it did not require ridiculous interest rate spreads, "only" a fiscal policy of systematic industrial sabotage. Indeed, the Danish version of the D-Mark peg has been a fiscal peg targeting interest rate spreads.

It will be interesting to see what happens the day it comes under serious attack. So far our oil revenues have made such attacks non-viable, but that state of affairs will not last beyond the present decade.

"It is better for all concerned, in particular for Greece, if the country leaves the euro temporarily," Hans-Werner Sinn, president of the influential Ifo Institute at Ludwig Maximilian University in Munich, wrote in an essay published two weeks ago.

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Asked about his position by e-mail, Mr. Issing answered indirectly, saying that countries that break the rules of monetary union -- as Greece did -- should have to fend for themselves.

"If a country does not comply with the conditions agreed on, it should not get further financial aid," he said. "A country which does not get further support has to decide what to do."

Mr. Issing and Mr. Sinn are both extremely influential, and their thinking provides an intellectual foundation for opinions widely held by ordinary Germans. Chancellor Angela Merkel is facing intense pressure within her own center-right party, some of whose members are pushing for a special party congress to discuss the debt crisis.

In the longer term, Greece can rebalance its foreign trade, but in the short term, "default and print money" is the only solution, and the only choice Greece and Europe has is whether it happens before or after the Greek economy has ceased to exist

The bond markets can't turn on Germany - Germany will be the last member standing in the Eurozone.

The bond markets can turn on the -Mark, in preference to the Swiss Franc. But frankly, if they believe that Switzerland has substantially better economic prospects than Germany then they are even more delusional than is usually the case.

But the bond markets are not so constructed to be able to save the euro. That would require euro zone wide cooperation and statesmanship along the lines Yanis Varoufakis has suggested in his "Modest Proposal". But, more fundamentally, it would require the major players to accept that euro-zone economics is not a game that one country can win because pursuing such an attempt will destroy the euro in proportion to the extent the policy succeeds. A policy to make all members prosperous would be most valuable to the largest players, but accepting this is highly unlikely. Such a change would likely only come about through the deaths of the leaders of the existing policy, along the lines Thomas Kuhn has suggested.

The problem is that an exit from the current situation requires a mature, adult approach that takes into consideration the needs and the lives of all involved and the vast majority of leadership on offer is by raging sociopaths who care only for their own aggrandizement or frightened, superannuated children who live in terror of the sociopaths.

One of the reasons for the US Constitutional Convention and the resulting ratification of the current Constitution was a situation similar to the one the EU is in.

Deutsche Bank, et.al., have shown they could give a rat's ass about the EU Project® simultaneously they have shown they deeply care about getting their money back, with interest. If the euro goes ker-blewie the financial instruments denominated in euros has as much value as German bonds denominated in Reichmarks.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Not if the way the -Mark falls apart is by ejecting the internal deficit countries one by one. Bailouts will then be decided on a case by case basis. Which means that what matters is how on how tight your political connections are to the CDU and the Quisling wing of the SPD.

Clearly, a number of bondholders view themselves as quite secure on that count. They may end up being surprised, of course, but by then the rest of us will be too busy trying to keep our heads above water to have much fun pointing and laughing.

Overall, the history of a currency collapse is the holders of bonds, etc., in that currency can suck eggs. There's no global agency to enforce a legal decision on a national government. Offsetting that, ss you rightly say. who, what, and how much of these instruments are backed in the new currency depends on the Decision Making of the elites in the defaulting country and the connections (being "one of the kewl kidz") the holders have.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

The bond markets can perfectly well endure a collapse of the Eurozone, if the way it plays out is that all the non-German members are ejected one by one, with the various three- and four-letter agencies bailing out the holders of these "feckless swarthy Southerners'" bonds. Every time, obviously, with the resolution "never again." Which is an incredible threat, in the game theory definition of that term.

That will be hard on the German (and possibly French) taxpayers. But turkeys don't get to vote on the Thanksgiving menu.

If the three and four letter agencies can actually bail out all of the bond holders, given the existing diameter of the Euro faucet. There is likely to be cascading failures, with most of the worst on a single day, certainly within a single week. Of course, Bernanke will offer unlimited dollar swaps. That is what he is there for.

They can, of course, bail out anybody important (NB: "Important" means "important to Angela Merkel," not "important to the national interest"). That was always within their capacity, and this whole theatre with the three- and four-letter agencies has been about concealing the bailout from the internal surplus countries' taxpayers and fraudulently cooking up a crisis to impose even tighter adherence to the Grief and Stupidity Pact.

But Merkel won't let them open the faucet wide enough to bail out Italy, Spain, Belgium and France, especially if the crises occur simultaneously. They could do it but for the rules they have set in place. Of course Germany has, in the past, had no trouble bending the rules when it is in its interest to do so.

It appears the Swiss Franc continues to appreciate with respect to the Euro. In fact, Zero Hedge calls the EURCHF exchange rate 'the most trustworthy indicator for European "bankrunny[n]ess'". And, also, the Swiss National Bank has been intervening in the markets to lower the Swiss Franc's value, going as far as to drop rates by 0.75% yesterday (!) which may have been a contributing factor to the French banking scare in the stock markets.

This day could come but right now I'd argue it's the opposite. The people rioting aren't needed by the world economy, yet the world economy still generates enough "excess energy" for this group of people to live on. If the parasitic wealthy kill off the technicians, then yes, this will probably play out.

Theoretically we could have created a society in which all this excess energy was converted to a lifestyle wherein humans simply get to enjoy being humans - but I say theoretically because it would have been (and was) outcompeted by societies who prefer guns.

It's a huge disaster - such a big proportion of the modern world no longer has access to the myths of a good life as offered by their individual cultures, much less the environment that actually leads to happy, healthy humans.

The hyperactive "Super" Sarkozy thinks she is ponderous, slow and too keen on rules; the methodical "Iron Frau" Merkel considers him overly impatient, impetuous and too quick to break them.

The pair do not speak the same language - literally or metaphorically - so like the hapless comic duo, when it comes to Franco-German relations anything can happen.

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[The Economist] quoted a former European foreign minister saying Merkel and Sarkozy found each other "mutually unbearable" but said they had found a way to get along despite disagreeing on a number of major issues, including fiscal harmonisation.

"France and Germany have never been natural partners. Agreement always has to be worked on," a French official told the magazine.

Last month, in a report of Sarkozy's visit to Berlin to discuss the Greek crisis, Der Spiegel wrote: "The welcome will once again appear very cordial... Nicolas Sarkozy and Angela Merkel will also work the cameras this time around ... a kiss on the left cheek, a peck on the right one, smiles and waving. Behind closed doors, the atmosphere will be less amicable." It added: "The fronts have hardened - especially between Germany and France".

In the past the modus operandi of France has often been to dream up big European ideas ... and expect Germany to pay for them.

The tensions were palpable, the theatrics mesmerising. It was well past midnight and the leaders, charged with saving the euro, were getting nowhere fast after a fine Friday supper. Greece might be saved. But Portugal? Ireland? Spain? Even Italy?

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Sarkozy claimed the political leadership of the 16 members, announced a defining victory against the markets and the "speculators" wrecking the currency. The metaphors were all martial. Europe was at war. He would not give away his "lines of defence". But by the time the markets opened on Monday morning, the enemy would have learned its lessons and beat a retreat.

In the previous hour upstairs at the summit, Sarkozy had thrown a wobbly. "It was really a drama," said an experienced European diplomat. "A very abrupt end to a summit - because Sarkozy said he had had enough and really forced Merkel to face her responsibility."

A European Commission official added: "He was shouting and bawling. The Germans were being very difficult, and not only the Germans. It was a big fight between Sarkozy and Merkel."

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According to senior Spanish government officials quoted by Spain's El Pais, Sarkozy called Merkel's bluff on what, 48 hours later, turned into a massive financial package that has rewritten the way the single currency functions and changed the European Union in fundamental ways that may take years to play out.

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"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," one unnamed Zapatero colleague told the paper. "That obliged Angel Merkel to bend and reach an agreement."

The French had Spain, Italy, Portugal and the European Commission lined up behind them. On the other side stood Germany, ranged alongside the Dutch, the Austrians and the Finns, all quietly hoping Merkel would prevail.

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"It was a fundamental discussion about sovereignty, about the role of the member state, about what the EU is for, the role and power of the European Commission," said a second diplomat.

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Europe was opting for shock and awe. Repeatedly in the past two weeks, Merkel has declared that "politics has to reassert primacy over the financial markets". This was the attempt.

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Tellingly, the White House confirmed that Merkel, not Sarkozy, was the main obstacle to a decision staggering in its scale and ambition. Obama and Sarkozy "agreed" on the need for urgent action, while Obama and Merkel "discussed" the need for urgent action.

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Outline agreement had been reached on the European fund of 500bn. But who would control it? The Germans insisted it had to be national governments, not the European Commission. They won that argument and Christine Lagarde, the French finance minister, pushed for a rapid conclusion before the Tokyo traders switched on their computer screens. As argument continued over how to label the rescue, the Dutch conjured a new concept that kept everyone happy - a "special purposes vehicle". The deal was done. France had won. Germany had lost.

"This was supposed to be a German euro. It's turned into a French euro," complained a German expert.

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Barroso's argument was for full-fledged harmonisation of tax and spending policies among the countries sharing the currency, otherwise the euro had no future.

"Let's be clear. You can't have a monetary union without having an economic union," he said. "Member states should have the courage to say whether they want an economic union or not. And if they don't, it's better to forget monetary union altogether."

And in Aachen the next day, Merkel started talking about "the pound, the deutschmark, the franc, and the drachma". It sounded almost nostalgic for the old, simpler days of Germans' love affair with their national currency, though her speech was to advertise her credentials as a fervent European.

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Sarkozy's famous victory is less than final - and he might yet regret his showdown with a chancellor of Germany.

Let me add this: Cyprus is still under attack, yet the (communist-led, I should remind readers) has agreed to austerity measures much more mild and indeed progressive (as they raise taxes on the richest and on property) in their effects that the usual kill-the-poor routine... This basically because the huge explosion last month, that knocked-out most of Cyprus' power generation and dealt a crippling blow to the economy, had made the government more susceptible to pressure, especially given the exposure to Greek debt and banks.

If this move by the Swiss National Bank does not work, then it is only because the SNB does not move with sufficient determination.

The SNB can always, should it so desire, use open market operations to place a hard upper bound on the Swiss Franc's appreciation relative to any other currency it cares to name. That's one of the privileges that comes with being a central bank.

If the Swiss central bank were able to increase the valuation of the -Mark relative to the currencies of our trading partners, it would have a deflationary effect.

But (a) simply defending the existing exchange rate is neither inflationary nor deflationary and (b) they can't seriously affect our trade-weighted exchange rate even if they were to try. The Swiss Franc simply isn't a big enough currency. Any Franc/-Mark exchange rate movement large enough to appreciably influence the Eurozone trade-weighted exchange rate is also large enough to cause politically unacceptable dislocations in Switzerland. And since the Swiss Franc is the currency under upwards pressure at the moment, the Swiss CB can always curtail such disruption.

It will be more interesting to see what happens if the Swiss CB fails to use the current upwards pressure to accumulate sufficient hard currency reserves to cover the inevitable exit from the Swiss Franc when the immediate panic subsides. Because then they will be defending against a potentially substantial depreciation of their currency.

People aren't buying the Swiss Franc because it's a groovy thing to do. They are buying it for a perceived benefit which, in turn, can be measured or valued. So the question becomes what, exactly, ARE they paying for that benefit?

Cutting to the chase: not much. Certainly they are not paying the full price for the benefit although the Swiss economy is paying the full cost of the benefit. Which argues the Swiss Franc is being bought below the (cost of production + profit) at this time, in these market conditions.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

That's something you do when you want to stem outflows. When you want to police inflows, you just put a hard cap on the rate of appreciation and use the opportunity to score some hard currency seigniorage.

Isn't there a simpler solution: You want CHF? Sure, let me print some for you. Here you are. Want more? I will print more.

If people noticed that the SNB would be willing to print, they would lose trust in the CHF as a store of value... No?

The SNB would just have to print enough to defray the craziness but not too much. It seems to me that they are in the better situation: Printing to lower the value of the currency not because they are in debt and need to service it.

Isn't there a simpler solution: You want CHF? Sure, let me print some for you. Here you are. Want more? I will print more.

Precisely. That's how you "put a hard cap on the rate of appreciation and use the opportunity to score some hard currency seigniorage."

If people noticed that the SNB would be willing to print, they would lose trust in the CHF as a store of value... No?

Doesn't matter.

If they do, then Mission Accomplished. If they don't, then they give you hard currency for free. Heads they lose, tails you win.

It seems to me that they are in the better situation: Printing to lower the value of the currency not because they are in debt and need to service it.

Yep, that's precisely what they're doing.

My concern is that they may not be doing it enough if the CHF is appreciating noticeably. Because this is hot money - it's not in Switzerland because it believes in the virtues of Swiss engineering. It's in Switzerland because it believes that Switzerland is a safe place to watch the -Mark come undone. Once the crisis is resolved - one way or another - they will move back out.

And the Swiss central bank can't print German money, so when they do, the Swiss CB had better have enough German money in its vaults if it does not want an object lesson in the difficulties of defending the lower bound of an exchange rate.

Of course, this is a notorious flag of convenience country we're talking about, so I won't precisely be crying my eyes out if they end up in a tailspin.

The CHF, outside of Switzerland, is a commodity ... like wheat, oil, etc.

Nobody has to "inflow" their CHF holdings into Switzerland to use it as a means of exchange. Firms can take their CHF holdings, convert to dollars, and buy oil - or whatever - on the global commodity market. By design the global commodity markets are outside the control of any one State, although some countries: e.g., US, China, have more short term influence than others.

Nobody has to "inflow" to use the CHF to play the "Financial Engineering" Game. Possible to use CHF to buy dollar denominated instruments paying interest in euros.

In both cases the affects on the Swiss economy - where they HAVE to take the CHF - can be dire if the "reverse seigniorage" percentage gets large enough.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Nobody has to "inflow" to use the CHF to play the "Financial Engineering" Game.

They do have to buy or borrow CHF if they don't have any to begin with. So they do create an inflow into the currency, even though they do not create one into the country.

Now, this can affect Switzerland in four ways: First, their buying of CHF can cause the CHF to climb relative to RoW. This is bad news for Swiss net exporters. Second, when they get tired of playing with the CHF they bought, they can exit their positions by buying stuff in Switzerland. That is not a serious problem for the Swiss unless they have very little slack in their economy, and even then only a minor problem. Third, they can exit their positions by buying other currencies with their CHF. This will be bad news for Swiss importers, including some net exporters. Fourth, they can move in and out of CHF in ways that increase the volatility of the exchange rate. This is bad for everybody except the noise traders.

The Swiss CB, meanwhile, can defend perfectly against the first effect if they want to. The second is not a serious problem. The fourth effect can be reduced by capping appreciation, which will simultaneously net the Swiss CB hard currency, at the "cost" of an overall net depreciation.

That leaves the third effect - a massive exit from CHF positions when the -zone crisis is resolved (one way or another). This, the Swiss CB can only defend against if they either (a) have considerably more hard currency than they need in order to simply pay out all those who wish to exit (since the Swiss CB can't distinguish between people exiting long positions and people shorting, so the latter can use the former to cover as they set up a Soros attack). Or (b) cut the balls off any Swiss bank that assists the attackers in shorting the CHF (since you need the cooperation of Swiss banks to create CHF for shorting).

to the Wonderful World of International Finance, where reality is how you calculate it.

International currency traders and hedge fund managers have bugger-all interest in buying stuff in Switzerland. There's nothing Switzerland produces they want or need. They do care about this, but not all that much.

International currency traders and hedge fund managers do not have to own CHF to play their little mathematical game - and it is a Game. All they have to do is have exposure to options:

Hell, a large trading company, making billions of CHF trades a hour, can "make" millions of CHFs, per year, by extending the mantissa on their trades a couple of decimal points to the right.

Or they can lie. If Goldman Sachs is telling you they want to make a small trade of 50 million CHF how the hell do you know if they DO have it sitting in their coffers? A desk trader doesn't have time to waste double checking their Cash Balance¹, if it is in his advantage to make the trade, he will. All GS has to do is come-up with the cash, or pretend to, in a Financially Acceptable Kind of Way - which is, at the bottom, a Financial calculation! - at settlement.

Nobody knows the actual monetary value of Forex trading done in a day. Firms who do this estimated in 2007 it's in the neighborhood of $4 trillion (US) a day, or about one year of US GDP every four days, and it is certain the volume has increase over the last four years. In the Forex market traders go about "buying France" in the morning, "selling Greece" in the afternoon to offset the trade is all in a day's work. Thus, the affects and effects of their trades in the CHF on the Swiss economy is of only idle interest - if the trader can have any interest at all since a goodly portion of these trades are done by computers. (How much? Don't know.)

Since US regulators can't rein-in this trading the SNB sure as hell can't. The system is set-up so no national government can. The best any national government can do is light a match in a hurricane.

The only way to slow down this nonsense and erect a buffer against damage it causes is to change the damn system by creating a global clearing house that can exact a Tobin Tax on each and every trade and a transfer fee when moving from one currency to another.

¹ Which you can't know until the end of the trading day in the best of circumstances.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

If somebody wants to Soros attack them, then somebody can. Plenty of operators out there who have better hard-currency credit than a small sovereign. There are ways to cut their balls off, but those ways require quite heavy-handed intrusion into your domestic banking system,1 which I am not confident the Swiss have the political stomach for.

If people do not want to Soros attack them, or even buy their stuff, then why, precisely, should they care that somebody is conjuring up some Monopoly money and playing with it? A run on fake CHF will not do anything the Swiss CB can't defend against if they want to.

- Jake

1Hike liquidity requirements above total outstanding sovereign bond volume, restrict rediscounts to notes collateralised by domestically held non-financial assets - or just to non-financial assets if you're feeling generous. Then publicly announce these measures, along with the fact that they mean that most of the alleged CHF being sold is not backed by any Swiss bank or government institution. That is, it is counterfeit in every way that matters.

If idiots persist in buying counterfeit CHF off Goldman or some other high street bank, well, that's their problem when Goldman can't deliver.

Because the Swiss could wake-up one day and find they no longer own their banking system or large manufacturing companies. The 1997 Asian Financial Crisis is instructive. At the last stages the Indonesia rupiah fell such an extent that it was possible, exaggerating only slightly, to buy companies producing $50 million worth of goods a year for $50 million.

As I've already said, currency traders don't give a hang about the relative valuation of the Real Economy of the country whose currency they are manipulating. There are, however, trans-national companies who do; their purpose of being is to seek out "under-valued" assets and grab 'em on the cheap. This process, confined within the US, is how Warren Buffet took a $3 million textile company and in 45 years turned it into a $372.229 billion conglomerate. At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.

¹ something nobody can predict

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

At the point everybody goes stampeding out of the Swiss Franc it's going to fall and if it falls low enough¹ it exposes Swiss companies to the predators.

Unless the Swiss National Bank has accumulated enough foreign reserves. But I guess your point is that it's impossible for the SNB to accumulate enough reserves to counter the possibility of massive naked short selling of its currency in the international FX market.

And my point is that if the Swiss regulator has its eyes on the ball, it can kill the hostile takeovers during any the potential CHF panic dead by requiring cash settlement of all stock market transactions before they are valid. Which means that naked short selling counterfeiting CHF will not enable Mr. Buffet and his colleagues to buy up real assets in Switzerland. They will have to short using real money to provide for takeover bids. Which means they will have to go to the Swiss banking system, which is the only place on the planet that can make genuine Swiss money.

And the Swiss CB/financial regulator can grab the Swiss banking system by the short and curlies quite literally overnight.

The potential for a debt spiral is very real, as any deterioration in the economy causes the HUF to weaken further, creating a negative feedback loop with Swiss Franc loans and further deterioration in non-performing loans. With another peak in gross government re-financing coming next year amounting to about 20% of Hungarian GDP, and the foreign debt burden denominated in HUF worsening, the markets are watching closely.

Interestingly, the Swiss themselves weren't foolish enough to do any of this lending. [!] Austrian banks provided about 40% of CHF loans in the euro-zone. And between 15-25% of the balance sheets of the top four Greek banks are exposed to SE Europe, including almost 40% and 30% of loans to the private sector in Bulgaria and Romania respectively, according to Macquarie Bank. In turn, German, French and other northern European banks are heavily exposed to Greece. No wonder then, that the EU fears the chain reaction which would ensue from a Greek default.

Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!

I'm beginning to think there are two scenarios:

Everybody gets together and writes off and offsets their debt, one to another, to reduce the mutual plunder via interest payments to a realistic level

A cascade failure ripples through the system and everyone's FIRE sector goes bye-bye

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

"There is nothing we can do to stop foreign exchange borrowing, and we don't even try. As members of the European Union, we have to respect the free flow of capital," he [Hamezc Istvan, director of Hungary's Central Bank] said.

In the interim, an IMF intervention and a rescue of the Central-Eastern European economies by encouraging Western Banks to not bail themselves out of their Central-Eastern European investments, going by the name of "the Vienna Initiative" has been in place since 2009.

We're going to have another round of currency crises in the same countries we have already had to rescue?

You're going to have countries going further into recession, making it harder for them to service their debt, that will be seen and responded to as a currency crisis.

So you're saying another three iterations of Teh Stupid: One to realise that it's a currency crisis (European Tribune: Get your news two years early), but deal with it by the IMF playbook. Another one to realise that maybe it's time to dust off the proper policy response (John Maynard Keynes: Get your policy response eighty years early). And a third one to actually get their act together and convince even the dumbest Bild Zeitung reading meatbrain that Keynes was right all along.

It is the monthly manufacturing PMI chart, and note the sharp smooth downward line, which stretches from February's high point of 62.7, down to July's 52. Yes, German manufacturing industry is still expanding, but only just, and it is the pace of the slowdown which is remarkable.

...

In Germany movements in GDP follow movements in the rate of expansion of exports. Let's not get into why that is for the moment (think Germany's particular demography), and just consider the possibility, despite all the talk over the years of Germany finally "decoupling", that it can't. Export dependence could well be the key explantaion for why the performance of the German economy is so "extreme" and so volatile, with quarters of record growth being witnessed just before the onset of substantial recessions, recessions which often register record falls in output only to be followed by massive recoveries. The reality is not that Germany is either a growth or a contraction champion, but that export dependency simply makes the German economy more volatile and more susceptible to sudden changes than those of some of its neighbours (like France).

...

But why do you insist that this won't simply be a slow patch, or a soft spot? Even the bundesbank is saying that German growth in the second half of the year won't be as strong as in the first half. Well, here comes exhibit B. The slowdown is global, and for an economy which needs growing exports to grow, then a global slowdown is a real problem.

If these conditions do trigger reforms - which in many countries is long overdue - that would be welcome. However, the fact that a member country can be assured that its membership of the euro - even in the case of permanent violations of the rules - will be saved at any price causes moral hazard and creates an obvious potential for blackmail.

...

Suggestions as to how one might control and limit the issuance of such bonds are unconvincing. Almost all treaties promising European fiscal discipline have been broken time and again. The worst example was delivered by France and Germany in 2002-03, when they violated the Stability and Growth Pact, and even organised a political majority against the application of its rules.

The article is very strange, he basically accuses Greece of blackmail and moral hazard while admitting that Germany and France broke the rules when it suited them, with no consequences. And the article contains a veiled threat hat Greece should be expelled while admitting the treaties don't allow it.

Of course, part of the dissonance is that the SGP is a pretty broken piece of work in the first place. My sense is that we don't want a Europe based around a strong, enforced SGP as it will just lead to collapse by a different route...

There is little hope for any country until it finds leadership that realizes that it does not have to be subservient to global markets and the current fashions of economic "philosophy" and that to be subservient is a political decision. Within their borders they can decide. Decide wisely and they can make a beginning of an end to the current misery. This is far from equally easy for each country, but smaller countries can band together with other small countries.

The problem is that politicians are rarely experts in technocratic matters (or even others matters - but they're good at getting elected). Not even Gordon Brown really knew, he is a classic case of the "useful idiot".

For advice on what to do they call in "experts". In the case of economics and finance they call on the Banks and credit houses as that is where the expertise resides. Unfortunately the advice given is extremely biased towards promoting the well-being of the institutions the experts represent which, given that these institutions are both predatory and parasitical on the country, means that the advice given is actually harmful to the interests of the country the politicians represent.

I do not believe the politicians understand this. So blaming them for the policies they promote kinda misses the point.

That's a key insight Helen. We need a generation of political actors that are extremely sceptical of this kind of 'expertise'.

Ireland was the most egregious case of this, and arguably the blanket Irish bank and bond guarantee in 2008 was the decisive initial act in ensuring the 'no bank left behind' policy at the expense of misery for the citizenry of the entire Eurozone.

I was not blaming the politicians, regardless of the contempt in which I hold their "leadership". Rather I was describing the sad situation and the path out of it. It is not necessary for political leaders to be "experts" in economics to lead their counties out of darkness. It is necessary that they realize, in Mig's words, "Economics is politics by other means", and to realize that being accessories to the looting of the people they are supposed to represent is unacceptable.

Economics is the problem, not the solution. The solution is to realize clearly that economics must be subservient to the political needs of the nation rather than to the interests of finance. When we grant TINA we fundamentally corrupt judgement. Judgement is based on emotional responses: this is food -- yum! this is a predator -- flee! We have allowed that judgement to be made by a tiny group of banker predators and the rest of society is, to them, just food. That is why policy is so confounding to the majority. They don't understand that the reference for judgement is not their broad interests.

I cannot complain too much about having allowed the disastrous developments of the last forty years. While I suspected and then believed that the policies being pursued were wrong-headed I did not understand why. That has made it difficult to mount a cogent critique. It is easier now that the system is destroying itself, but still far from easy.

It is necessary that they realize, in Mig's words, "Economics is politics by other means", and to realize that being accessories to the looting of the people they are supposed to represent is unacceptable.

It would be unseemly to have agents of the state or crown going to individuals and shaking them down for all of their liquid wealth, so they use economics for the same purpose, but better. Better because through economics they can get people to make their assets liquid in anticipation of gain, though that ruse is now wearing thin.

Yes, but these people who can make a difference are surrounded by so many layers of buffering to prevent reality seeping in that they are effectively sealed off from it.

then having the ability to forensically analyse the trail from advice to destruction and realise they're being lied to; well at that point they'll find themselves re-shuffled or sacked or have an aircraft accident (just kidding folks).

A large part of the problem is that for current leaders to accept that the economic theories they have been faithfully attempting to implement are actually harmful and only serve the very wealthy, they would have to accept that they are accomplices. Most would not like to think that of themselves, so they cling to the old theories, by the lights of which they remain virtuous.

No new measures were announced, but Mr Sarkozy insisted that "commitments to reducing the deficit are inviolable and will be maintained".

So what's this, then?

Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important - and, unhappily, one of the least understood - rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment.

Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action.

The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending.

The no-business meetings of the great business executives depend for their illusion of importance on something quite different. Not the exchange of ideas or the spiritual rewards of comradeship, but a solemn sense of assembled power gives significance to this assemblage. Even though nothing of importance is said or done, men of importance cannot meet without the occasion seeming important. Even the commonplace observation of the head of a large corporation is still the statement of the head of a large corporation. What it lacks in content it gains in power from the assets back of it.

[...]

The no-business meetings at the White House were a practical expression of laissez-faire. No positive action resulted. At the same time, they gave a sense of truly impressive action. The conventions governing the no-business session ensured that there would be no embarrassment arising from the absence of business. Those who attended accepted as a measure of the importance of the meetings the importance of the people attending. The newspapers also cooperated in emphasizing the importance of the sessions. Had they done otherwise they would, of course, have undermined the value of the sessions as news.

In recent times the no-business meeting at the White House - attended by governors, industrialists, representatives of business, labor and agriculture - has become an established institution of government. Some device for simulating action, when action is impossible, is indispensable in a sound and functioning democracy. Mr. Hoover in 1929 was a pioneer in this field of public administration.

As the depression deepened, it was said that Mr. Hoover's meetings had been a failure. This, obviously, reflects a very narrow view.

I've been to those at both Nat West bank and BBC; they happen at all levels of an organisation.

I was fortunately in a position to refuse (ie bloody minded enough) strongly worded suggestions that I attend one regular non-meeting which, although it didn't harm my career, alienated one particular manager who I generally regarded as one of the "good guys".

Since Monday the ECB has been buying Spanish and Italian debt in the secondary market aiming to drive down the yields and hence ensure that both countries can afford to borrow from the debt markets.

The yields on both countries' debt had increased sharply in the preceding fortnight (post-the latest Eurozone crisis summit) in a pattern which has become strangely familiar over the past year - the yield hits 6%, the country denies there is a problem, it hits 6.5%, more denials and suddenly it is at 7% and a `bailout' is being arranged.

Whilst Ireland, Portugal and Greece represent 4.5% of EU GDP between them, Spain is 8.7% alone and Italy is 12.7%. They are too big to fail - but also possibly too big to bailout.

If Italy and/or Spain were to require a bailout they would obviously not be able to participate in the EFSF - at which point the increased costs to France (in particular) would become perhaps insurmountable. In other words if one of these two go, the whole crisis coping mechanism goes with it. (Not to mention the fall out in the banking sector).

So - back to the original question, is the ECB intervention working?

As the yield demanded by investors has fallen from well over 6% to around 5% in both cases, it may appear so.

PS - anyone who is not a regular reader, please go read Duncan's blog. There are many things (IMO) that he hasn't worked out yet, but he's fundamentally a good guy and deserves more traffic on his blog.

The survey found that 79% of respondents said they were worried about France and 67% for their personal situation. Among people, leaders, or institutions they trust to help avoid a new financial and economic crisis, respondents put themselves in first place (48%). Then it's Mme Merkel and the German government (46%), IMF (41%), companies (39%) and Europe (36%).

Mr Sarkozy and the French government only get the support of 33% of respondents. In contrast, distrust is particularly marked for traders (6%), banks (17%) and the rating agencies (17%). Concerning the capacity of France to reduce its deficits and debt, respondents favoured spending cuts (85%) to higher taxes (12%).

The question might also be: "Do you want your country's finances to collapse or would you prefer that fair and progressive taxes be imposed AND COLLECTED on the to 2% of income earners.?" It amounts to the same thing.

People are thoroughly indoctrinated. Nobody is aware of what you say, everybody has got the message that raising taxes is bad.

I can't help thinking, though, that if the word "fortement" had been left out, the distribution would have been less markedly anti-tax. Even less so if the fiscal advantages Sarko has granted to the wealthier were mentioned as being top of the list for change.

Almost all developed countries have enormous debts. Their problem: government revenues are too low. Insolvent countries have to raise taxes now - to a level comparable to Germany. A guest column by economic council member Peter Bofinger.

Actual and hypothetical budget balance 2011 of selected OECD members (% of GDP)

Indeed they are, but raising them would not reduce the sovereign deficit, given a commitment to full employment fiscal policies. And if the private sector is deleveraging - as is presently the case - not even without such commitment.

amusing. Disappointing in the first case as well as whe is a pretty good one.

DSK would never have made that mistake but then, he's got other problems (and I'm not talking about his New York maid problems)...

Next year will be interesting indeed, suspect a lot of movement in advance of elections, as economists on left (well, our left) and right (borrowing heavily from Front de Gauche economists, this is probably woth a diary) both see the Euro for what it is, a hard shackle against growth, stablity and social equality around all of the EU save a couple of countries in the center (and I can only think of three or four...DE, NL, AT and LU).

If France detaches as well from the interested center of the Eurozone...well, then all things become possible.

The Hun is always either at your throat or at your feet.
Winston Churchill

Back in January (of 2011), DSK was being interviewed by a BBC Radio journalist in the context of a documentary on the history of the IMF.[1] Toward the end of the program, I heard the distinctive voice of DSK responding to a journalist's question about how the global economy ought to be reconfigured in the aftermath of the 2008 Crisis. His astonishing answer was:

"Never in the past has an institution like the IMF been as necessary as it has been today... Keynes, sixty years ago, already foresaw what was needed; but it was too early. Now is the time to do it. And I think we are ready to do it!"

This was, in my estimation, a bombshell of a programmatic statement by the IMF's Managing Director. What was he referring to? He was, of course, referring to Keynes' powerfully put argument (in the context of the 1944 Bretton Woods conference) that a system of fixed exchange rates cannot survive for long without an automated mechanism that treats (a) systematic trade surpluses and (b) systematic trade deficits as the different sides of a problematic coin.

Was more thinking what he would do as PM of France. Not optimistic about that given the constraints Germany would put on him.

As IMF head, no debate from me, better than what we had, better than what we have. Still not an ideal institution though, have spent most of their institutional life destroying economies with their "advice" and their "ultimatums" relative to the aid they mete out.

The Hun is always either at your throat or at your feet.
Winston Churchill

If the owners of the Euro (France and Germany) are affected, then we might see some thing moving forward.
When only the peasants are suffering, nothing would move.

Then, of course, with our current politicians (and hedonistic, self-centered society) "moving forward" might even be worse. Especially if "moving forward" ends up being France and Germany moving against each other.

The start of the Great Depression is commonly assumed to be the October 1929 stock market crash in the United States. It didn't really become the Great Depression, however, unti 1931, when Austria's Creditanstalt bank desperately needed injections of capital. Essentially, neither France nor England were willing to help unless Germany honored its reparations payments, and the United States refused to help unless France and the UK repaid its World War I debts. Neither of these demands was terribly reasonable, and the result was a wave of bank failures that spread across Europe and the United States.

"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," one unnamed Zapatero colleague told the paper. "That obliged Angel Merkel to bend and reach an agreement."

The French had Spain, Italy, Portugal and the European Commission lined up behind them. On the other side stood Germany, ranged alongside the Dutch, the Austrians and the Finns, all quietly hoping Merkel would prevail.

...

Sarkozy's famous victory is less than final - and he might yet regret his showdown with a chancellor of Germany.

The three-month euro-dollar cross-currency basis -- which reflects the premium for swapping euro Libor into dollar Libor -- widened to as much as 95 basis points, up around 40 bps since the start of August, though still well short of the 300 bps seen at the height of the financial crisis.

Emergency overnight borrowing from the European Central Bank surged, with banks taking over 4 billion euros of overnight funds from the ECB, the highest since mid-May.

The signals coming from Europe set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.

Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.

"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.

Funding really becomes a concern where it impacts the long end, i.e., if a bank cannot independently fund in the senior unsecured debt markets, it does not have a long-term viable future. While issuance has been negligible since July, this is because large EU banks have pre-emptively funded typically 70-90% of their 2011 needs, limiting the need for additional issuance into troubled markets. BNP is 100% complete, while SocGen has completed 93% of its 2011 funding.

...

About that long-term issuance Nomura mentions at the top by the way -- it's worth reprising some recent charts from Morgan Stanley bank analyst Huw van Steenis. They show the recent slowdown in markets and also the funding needs into 2012:

There follow two very scare charts, one of bank funding drying up to a trickle in the first half of this year, and the other of all the European banks' debt rollover needs for the next few years.

The advantage of short-term funding is to increase leverage and short-term "investments-per-year."

The disadvantage is when things turn sour leverage works against you and those short-term investments turn into near and long-term investments you have a hard time, or find impossible, to get out to pay Due and Payable Accounts.

Migeru and kcurie have been working on the math of this and Migeru talks about it here.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Well, in a properly run central banking system, the CB should act as market maker of last first resort between long and short term funding. So the problem is not, in a properly run central banking system, in the nature of short-term funding (of course in the central banking system we actually have, we are saddled with the ECBuBa...). The problem is in the nature of the geometric effect of leverage upon the solvency of holders of garbage assets.

.....the Swiss National Bank is sailing in uncharted monetary waters by choosing not to sterilise its CHF credit/money creation.

Of course the Swiss fiscal position is slightly different from that of the US.

With capital preservation becoming the top priority for banks, institutions were willing to pay more than the face value of Treasury securities, because investing elsewhere would come with too great a risk of default.

And, yes, the downward spiral really did begin with the trend towards a collateralised lending regime.

So is the SNB taking a risk? Yes. Arguably it is.

Is the Fed concerned about similar issues? Yes, possibly.

In which case traders should really re-evaluate how they interpret QE. After all, it's very possible the Fed decided not to implement more QE exactly because of fears that Treasuries were once again becoming Giffen goods.

Or as Falkenblog had it when that blog's author independently came to the same conclusion three days ago....a Geithner good

Today's Treasury move didn't work directly via the income effect, but indirectly via the income effect's effect on the substitution effect, so it's not a traditional Giffen good, rather, a 'Geithner good.'

It looks like the Fed is running out of options: the Treasury isn't, of course, but the US government is ideologically painted into a corner through a diametrically false assumption as to the nature of fiat money itself......

"The future is already here -- it's just not very evenly distributed"
William Gibson

I suspect the recent fall in US Treasury instruments has as much to do with the Big Boys not having the time or made the decision (given the lack of action by Moody and Fitch) to change their program trading programs in the wake of the S&P downgrade.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

There's a sense that the US crisis is done with for now. S&P downrated, but the others won't - so the dollar is a safe haven - and there's a lot of money trying to get out of the Eurozone before it crumples...

So if people are moving out of the euro or dollar they are parking their money in the Yen or the capitalist paradise of Sweden. :-)

Thus, I think it's safe to claim the price rise of US Treasury instruments, and the resulting decline in their interest rates, is people moving within the dollar.

One thing that may also bear on this is we're hearing, in the US, there are trillions of dollars owned by US corporations being held outside the US because they don't want to pay the repatriation tax. Buying Treasuries is as good a place as any to park it until they decide what to do.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

No, a dropping ($)/SEK exchange rate means that people are moving out of Swedish currency, which is consistent with the general pattern of people moving into large currencies during times of uncertainty.

There are at least six ways a downgrade could affect the EFSF, write Credit Suisse. These are not mutually exclusive and some are fairly straight forward. Nevertheless we found them quite useful, especially for those newish to the scpectre of a French downgrade. The most likely CS scenario is that a French downgrades results in the loss of the EFSF AAA credit rating and thus the beast begins to eat itself and funding costs increase. But there are others...

Industrial output in the 17 countries that make up the euro zone fell 0.7% from May, the sharpest drop since December; it was 2.9% stronger than in June last year, which is the weakest annual rise since January last year, the European Union's Eurostat agency said. The estimate for output growth in May was increased slightly to 0.2% on a monthly basis and 4.4% on an annual basis.

...

Official data released by France's Insee agency Friday showed the euro zone's second largest economy stalled in the second quarter after growing 0.9% in the first. The figures are a fresh blow to France after markets plunged earlier in the week on concerns about the country's triple-A credit rating following the U.S. downgrade last week.

A survey of manufacturers across the euro zone released last week by Markit had already shown the sector slowed to a near standstill in June with activity growth at its weakest level for almost two years. Within the euro zone, industrial production fell 0.8% in Germany in June, 1.7% in France, 0.6% in Italy and 0.8% in Spain, Eurostat said.

for the moment the ECB has stopped the crisis. And because all of you like to think the ECB (should I say EZB?) is just a german conspiracy, one of you even talking about the Bundesbank, a branch office of the ECB and irrelevant since a decade: The germans at the ECB opposed the intervention - and were just voted down. How do you all integrate this simple fact in your germany wants this and doe that conspiracy theories?

Another thing, Germany is real existing country, not a movie villain. The German opposition, riding high in the polls just now, is pro Euro bonds.

For the moment the ECB is finally doing its job, which has slowed the deterioration of the European economy.

To stop the crisis - nevermind reverse the damage already done - would require an appropriate fiscal response. This in turn would require abandoning all this Austerity bullshit and purging enough of the Hayekians from the ECBuBa that we could be reasonably confident that this fiscal response would not be sabotaged at some inopportune moment to assuage some delusional inflation neurosis.

The Germans (and their Dutch, Finnish and Austria buddies) prevented the ECB from intervening in the Italian bond markets on Thursday. Therefore there was a panic of post-Lehman-Brothers proportions on Thursday and Friday
Who Could Have Predicted?
And then it took until late Sunday to extract from Germany a grudging agreement to support the Italian and Spanish bond markets.

But of course the markets don't think there is an actual commitment to continue to do this, so the equity markets everywhere are diving and there's a flight to safety in US Treasury bills, German Bunds, and Swiss Francs.

Germany is a really existing country, and Merkel, Wiedmann, Ackermann, Stark, Issing and Sinn, to name a few, are really existing villains. We're aware people like the SPD's Sigmar Gabriel have different opinions

Sigmar Gabriel (SPD Chairman) calls for eurobonds

The FT today also reported the following: "Sigmar Gabriel, SPD chairman, on Tuesday promised his party's support once again, and argued that the German government should go further, and allow eurozone bonds to be introduced, ensuring easier borrowing for the most debt-strapped eurozone member states." Of course, this statement underplays the importance of eurobonds. The point is not to make borrowing easier for peripheral states. The point is to rationalise debt management at the eurozone's level and to arrest the negative dynamic (see here for a graphical representation of the latter).

Someone above thinks Sinn - who everybody on the left, if not the center, hates is more or less the same like Bofinger and you can amalgate them under the rubrtic "german economists".

shrug

Anybody who talks about sovereign deficits without talking about the external accounts is part of the problem, not of the solution. Raising taxes is less harmful in the sort term and has some benefits in the long, so it beats slash-and-burn Austerity. But it will not solve the problem, and pretending that it will obfuscates the nature of the problem.

And yes, Germany has a larger f(r)action of such economists - certainly a more vocal one - than any other Eurozone country. And yes, deficit errorism is more obnoxious when it is espoused from within a narrative of national exceptionalism. And yes, other internal surplus countries do it too, but Germany is the undisputed leader and spokescountry for the surplus faction. So it gets most of the pillorying. For the same reason that Likud gets more hate for Israeli Apartheid policies than Labour, despite their actually implemented policies being so similar as to appear indistinguishable to an outside observer.

It may be more correct to say that most economists don't understand national accounting, that most German economists talk like German exceptionalists and that this is unhelpful. But concision has a virtue of its own.

The fanatics Germany did send to the ECB wre just voted down.

Now the question is why the rest of the ECB did not do that earlier; Occams razor: They are a bunch of neolibs too.

Nobody is suggesting otherwise. The decision to help Ireland commit assisted suicide and the decision to throw Greece under the bus were virtually unanimous.

However, a solid majority of these neolibs began to see the handwriting on the wall around the time Portugal was thrown under the bus. They even started talking about maybe not doing it. I labour under no particular illusions that they were doing that out of concern for Portugal, but by that time even the dumbest neolib could see that Spain and Italy would be next, and Italy appears to have been the swing vote.

As soon as that sort of talk started, the German government and the BuBa pitched a public hissy fit and threatened to pick up their marbles and go home.

It is possible - even probable - that this was simply taken as an excuse to do nothing by people who were already inclined to do nothing. But the fact remains that the BuBa has a twenty year history of pitching hissy fits at any suggestion that it should maybe stop demanding that other people - anybody and everybody except the BuBa - must pay the cost of defending its exchange rate policy.

And the fact remains that BuBa hissy fits have marked the end of every discussion of measures that might actually have helped resolve rather than deepen the present crisis. Would those discussions have led to meaningful action if the BuBa had not pitched those hissy fits? We do not know - it is possible that some who lent verbal support to such ideas did so in the expectation that the BuBa would provide an excuse to back out. But we do know that the BuBa is a major part of the problem.

Not it isn't. It is a regional branch of the ECB. You are living in the past.

And what effing exchange rate poliy? There is no exchange rate in a currency union. And regarding the exchange rate of the euro, do you want to argue it is undervalued?

"As soon as that sort of talk started, the German government and the BuBa pitched a public hissy fit and threatened to pick up their marbles and go home."

The opinion of the german government - the position of the opposition is different, you should admit at least that - was rightly or wrongly shared by a lot of other countries. Regarding the Bundesbank, what are you talking about? How exactly can they pick up their marbles and go home? They are just a administrative sub-division of the ECB. They can't go home, there is no home anymore. They have exactly one division, that is one vote at the general council. Like estonia.

And, no , "concision" doesn't justify rampamt national stereotyping. Bofinger isn't Sinn and if you are unable or unwilling to admit even that, you shouldn't comment on german economic debates.

And what effing exchange rate poliy? There is no exchange rate in a currency union.

A currency union is an exchange rate policy.

And regarding the exchange rate of the euro, do you want to argue it is undervalued?

No, the -Mark is about where it should be, since its external accounts are roughly in balance.

The problem is that Germany (and the Netherlands, Austria and to an extent Finland) want to run an internal current accounts surplus but do not want to finance the internal deficits this creates.

The opinion of the german government [...] was rightly or wrongly shared by a lot of other countries.

Yes, that's what I wrote: The German government and the BuBa pitched a hissy fit, and the rest of the EPP-PES shut up and fell back in line. You seem to be claiming that they would have done so even if Merkel and the BuBa had not pitched a hissy fit. In that case, one cannot help but wonder why the BuBa broke the confidentiality of ECB proceedings - confidentiality that was instituted at the BuBa's insistence (because the BuBa does not like democratic oversight of central bank operations). That seems like a rather drastic sort of step to take simply to voice a consensus position.

the position of the opposition is different,

Die Linke are talking sense most of the time, but they are at least two election cycles away from being in a position to appoint ECBuBa governors. As for the SPD and Die Grüne, their wage suppression policies from the last time they were in government are a substantial part of the problem (Hartz, anyone?). A stint in opposition may have reduced the amount of neoclassical brain rot in those parties, but I'll reserve judgment on that count until I see what they do the next time they have a chance to actually do something.

Regarding the Bundesbank, what are you talking about? How exactly can they pick up their marbles and go home?

Uh, by not clearing -Mark transactions with other countries and reissuing D-Mark notes.

They are just a administrative sub-division of the ECB.

You know that and I know that, but from their public pontifications it does not appear that the BuBa officials have quite internalised that fact yet.

Bofinger isn't Sinn

Didn't say that. I said that neither understands national accounting. Which is true.

"Uh, by not clearing -Mark transactions with other countries and reissuing D-Mark notes."

Mark? Petty.

And that is an illusion. You are basically arguing that because the Bundesbanks sometimes talks as if the still matter, they still matter. But they don't. Sticks and stones will break my bones, but words can never hurt me.

"s, that's what I wrote: The German government and the BuBa pitched a hissy fit, and the rest of the EPP-PES shut up and fell back in line. You seem to be claiming that they would have done so even if Merkel and the BuBa had not pitched a hissy fit"

So the right-wing government of say the Netherlands are closeted Keynesians or even MMT people? And the act like they act only under german duress?

"Didn't say that. I said that neither understands national accounting. Which is true."

"National accounting" has nothing to do with taxation levels. The higher levels of taxation in the scandinavian countries or (somewhat) Germany is the result of prefered policies. As Bofinger pointed put, you can't run a good state on the tax levels of the US or Ireland. That has nothing not with current account balances; Ireland is running a surplus and a big budget deficit.

And that is an illusion. You are basically arguing that because the Bundesbanks sometimes talks as if the still matter, they still matter.

If they did not matter, they would be punished for breaking the rules of confidentiality that they themselves insisted on.

They're not, so they do.

Sticks and stones will break my bones, but words can never hurt me.

They can increase bond spreads. And since the BuBa has been the most poisonously opposed to doing anything meaningful about those (that is, unrestricted primary market operations)...

So the right-wing government of say the Netherlands are closeted Keynesians

No, the Dutch are almost as insane as the BuBa. But the Spanish , Italian and French governments are just barely smart enough to see that the only solution to this crisis is to print money. German hissy fits at every mention of this solution is not a helpful part of the European political scene.

"National accounting" has nothing to do with taxation levels.

But everything to do with the ability of taxation levels to affect the sovereign budget outcome in the context of a deleveraging private sector.

As Bofinger pointed put, you can't run a good state on the tax levels of the US or Ireland. That has nothing not with current account balances;

The quite clear implication of the table Mig quoted was that if just the countries running sovereign deficits in excess of the Grief and Stupidity Pact limit would institute German levels of taxation, those sovereign deficits would go away.

Why? Common courtesy. Making passive-aggressive side-swipes does not increase the signal to noise ratio of the comment thread.

But I will try: The governing council of the ECB has 23 members. Only two are german. (You don't really need a link on that, do you?)

So how exactly it is a purely german institution or even dominated by former and current members of the bundesbank?

NATO has 28 members, of nominally equal voting weight. How come it's viewed as an extension of the Pentagon? The other members can just say "no" (many NATO decisions require consensus).

And that's leaving aside the fact that the ECB is legally obligated to pay far closer attention to bullshit BuBa neuroses (and yes, those are BuBa neuroses - those requirements were put in the treaties at German insistence) than NATO is to pay attention to American concerns.

So you want to evade to a NATO discussion? Not helpful. And the power of germany relative to the other european countries can't be compared to the power of he US rewlative to other NATO countries. German gdp is the size of France and Belgium or France and the Netherlands. Not so long ago, US gdp was as big as the gdp of all other NATO members combined. I hope I don't have to speak about the disparities in military spending, power etc.

And that bigger countries have somewhat more influence is normal. Germany is more powerful in the eurozone then Estonia. But so is Belgium.

Legal obligations: Well yes. A matter of interpretation mostly. What is price stability, after all? 1%,2%, 3% inflation? Fighting deflation? I won't say the governing council of the ECB can just do what they want. But they have considerable space within the legal mandate. They just don't want to use it.

And instead of critiquing the ECB or thinking about how this can be changed, you seek out a national scapegoat, letting right-wingers in all other european countries off scot-free. Neoliberalism is awesome, if just the evil germans wouldn't ruin anything.

Did you not pay attention back in February, March and April, when Mig and I were tearing Trichet new orifices on a regular basis? Did you fail to notice the criticism of Zapatero for throwing Greece under the bus? Did you miss the whole "these people should go to prison" bit I did back when Fianna Fail was killing the Irish economy?

I do remember our debates about Ireland. I pointed out that Ireland is a failed neoliberal utopia and that it's low tax - tax haven - no regulation model failed. And that Fine gael and Fianna fail are six and half a dozen. And that regarding the corporation tax rate., Ireland started the race to the bottom.

All I got back were assurances that I threaten the "sovereignity"of Ireland, probably in the pay of hedge-funds, that Fine Gael is just groovy, that nothing was rotten in Ireland prior to autumn 2010, tacky references to a "fourth reich" and so on.

You especially did see no problem in Ireland at all that couldn't be solved with a default, but only on foreign creditors. Taxes could and should never rise and nothing should be changed at all. All problems of Ireland originated in same far away country, preferably Germany. Basically you proposed that the Irish welfare state could be kept compatible with low taxes eternally by subventions from other EU countries. Why poorer EU countries should subsidy rich Ireland, you never explained. And yes, Spain, Portugal and Greece are a lot richer then eastern europe too.

I really can't think of anyone on this site whole would describe Fine Gael as "just groovy". And we've been busy ranting about the Irish system for years - generally in response to the stupid claims by EU leaders about how great it was and how wealthy it had become on light regulation and low taxes. How many times have I pointed out that the main thing going on before the before the boom got silly (mid 2000's?) was catch up due to infrastructure spending by the EU and favorable demographics?

The Irish tax system needs restructuring, but the problem wasn't so much that the rates were too low but rather that they were too dependent on cyclical spending - and construction in particular - and that should have been fixed when we had the money sloshing around to do it. Raising personal taxation rates in a depression is not an especially good plan. Neither are massive government cutbacks, of course.

I was thinking more of the other irish commentator. And no, I won't waste my time seeking old comment threads. I know ET sometimes has a somewhat exaggerated notion of its own importance, but that isn't worth the time.

And irish taxes in relation to gdp are below the average. And that is a problem. Now you argue with GNR and the gap between GDp and gnr in Ireland. But that just proves the status of Ireland as a tax haven.

Ok, then I'll assert that you're mixing up comments made elsewhere with comments here.

Irish taxes are a bit low, but so's spending, generally. Which isn't what the debate in Ireland says, of course, but there you go. The conventional wisdom is of a high tax, high public spending economy - which is total bollocks when you look at the numbers.

I do remember our debates about Ireland. I pointed out that Ireland is a failed neoliberal utopia and that it's low tax - tax haven

Which is not actually true (lower headline rates but better enforcement gives it similar corporate tax share to France), but let's not allow that to get in the way of a good rant.

And that Fine gael and Fianna fail are six and half a dozen.

But the CDU and SPD are not?

that nothing was rotten in Ireland prior to autumn 2010,

Uh, no. You will have to provide a reference when you make such scurrilous accusations.

tacky references to a "fourth reich" and so on.

See above regarding references and scurrilous accusations. This particular one should not require any great skill at Google-fu to find, if it actually transpired.

You especially did see no problem in Ireland at all that couldn't be solved with a default,

I did not see any problem in Ireland that was any of my business and which could not be solved with a default. If the Irish want to blow housing bubbles, then that's their problem. And if stupid French, British and German banks want to lend them money to blow bubbles, then I have absolutely no sympathy when they lose their shirts. Certainly, the Irish taxpayer (or, for that matter, the German taxpayer) should not be forced to pay for the stupidity of banks that lend against overvalued collateral.

but only on foreign creditors.

[Citation needed]

Taxes could and should never rise and nothing should be changed at all.

[Citation needed]

Basically you proposed that the Irish welfare state could be kept compatible with low taxes eternally by subventions from other EU countries.

Uh, no. I said that Ireland should not raise taxes in order to pay stupid banksters who placed bets on a real estate bubble.

Whether the Irish want to run their welfare state by printing Treasury bonds or by taxing is for the Irish to decide. Nobody is holding a gun to any foreigner's head and demanding that he buys Irish Treasuries - Ireland, remember, has a current accounts surplus. Their current predicament is caused by capital accounts inflows to blow bubbles - something for which the lenders are at least as responsible as the borrowers.

What I argue is that the Irish central bank should be allowed to buy those Irish Treasuries, at issue and in unrestricted volumes, because the money markets are totally unfit to make policy of any kind, including interest rate policy.

I won't waste my time with that. I don't need to, naynway: You open up with a spirited defense of the rish corporation tax.

"But the CDU and SPD are not?"

Actually, no. Even the CDU is probably to the left of both major irish parties.

"I did not see any problem in Ireland that was any of my business and which could not be solved with a default. If the Irish want to blow housing bubbles, then that's their problem."

Ah, no. European tribune, remember? Everything in the EU is my business too. If you want to think in nationalistic way, that is not my problem. By the way does that means you will shut up about domestic german politics in future?

"Uh, no. I said that Ireland should not raise taxes in order to pay stupid banksters who placed bets on a real estate bubble."

But even after you factor out all bank related spending, there still is considerable deficit in Ireland.

"Nobody is holding a gun to any foreigner's head and demanding that he buys Irish Treasuries - Ireland, remember, has a current accounts surplus."
Exactly. That means that your current account deficit (or even trade deficits) argument cause budget deficits is false. But whatever. Fine. Let's cut ireland off. Do you really think the considerable primary deficit will then be financed by domestic irish creditors?

"What I argue is that the Irish central bank"
What central bank? Are you talking about the ECB?

No, the Irish central bank. You may have heard about it. It's a shareholder in the ECBuBa. One of the peculiarities of the ECBuBa's construction - yet another one introduced at German insistence - is that it is not backed by a proper fiscal authority. It is backed by the member central banks, which in turn are backed by their respective treasuries. So if you don't like having the ECBuBa buy Irish sovereign bonds, just allow the Irish central bank to do so.

That's what it's usually called when people repeat factually inaccurate claims after having been repeatedly corrected in the past.

And you damit the point on deficits?

What point?

That Ireland is currently running a deficit, even when you take out all interest payments on the sovereign debt (which are odious subsidies to people who have more money than they should) and all the costs of guaranteeing anything beyond insured deposits and vital clearing functions in their banking system?

They probably are. They damn well should be, considering the rate at which their private sector is deleveraging.

That Ireland is running a structural deficit in excess of what is required to accommodate a sustainable growth path? I wouldn't know. I haven't run those numbers, or even formed a coherent idea about what a sustainable growth path would be for Ireland. I'm prepared to be educated if you are better informed than I am on such matters. But "pay back their national debt" is not a sustainable growth path.

Low headline rates and better enforcement can easily mean higher effective rates. The US has one of the highest headline rates of corporate taxation - and it's been decades since Uncle Sam saw a single red cent from most of the big transnats.

did start the trend to lower corporate tax rates in europe

Assuming that you don't count the UK as being part of Europe, because they have a two decade head start on Ireland in that game. And the Dutch didn't cut corporate taxes so much as never have much of them in the first place.

You are critiquing a neoliberal caricature of Ireland, invented to suit their propaganda needs.

Being at tax haven isn't a sustainable growth path either.

Where, precisely, did I contend that?

And as Bofinger pointed out, the tax level of ireland is below the european average.

Source? You did quote the article. And you could just look up the numbers at the OECD.

In the real world, Ireland and the rest of neoliberal countries opposed any attempts of SPD led German governments at regulation at the EU level. As far as I understand neoliberalism did take over in Ireland with the rise of the progressive democrats in the late eighties.

The point about the deficit is that you can't look at it in isolation. Public private and external balances always sum to zero. And if the private sector is indebted over the level it can bear neither raising taxes nor cutting spending will get you a balanced government budget.

Uh, yeah. That's what you're doing wrong. If you want to argue that the Irish government should tax and spend more, then that's a perfectly valid argument. They should.

But if you want to argue that the Irish government should tax more without spending more, then you need to explain where that money is gonna come from. 'Cause the Irish private sector does not have any right now.

I guess the fallacy of composition isn't just for neoclassicals anymore.

And of course there a lot of countries with a balanced budget and account deficits. Like the US in 2000.

Of course it does. That is why the level of taxation is low. In you logic taxes as a proportion of gdp can never rise.

Of course it can. What can not (sustainably) rise above a certain level is the sovereign's surplus as a fraction of GDP. Because the sovereign's surplus is limited by the rate of real capital investment plus net foreign inflows.

And I did I say anything about raising taxes now?

Um, if you want to make plans for ten or twenty years down the road (depending on how soon we stop this Austerity bullshit and start printing money in unlimited amounts to fund countercyclical spending) when this depression is over, then OK, that's a fun game.

But then talking about taxes is playing it backwards: You'll want to talk about what you want the Irish sovereign to do, figure out how much purchasing power you need to drain from the private sector to do it without creating shortages, and then decide upon the distributional profile you would like.

Clinton, because you want to talk more about the example, did raise taxes in 1994. Conservatives - and now you - predicted ruin. And?

Actually he cut them back again in 1995 (of course those were a different sort of taxes - no points for guessing the overall distributional effect of those two moves), which may be more relevant to the stock bubble.

But anyway, no. The sovereign surplus did not cause the bubble. The bubble caused the sovereign surplus. Taxing the bubble was a perfectly sensible thing to do, but believing that those surpluses were sustainable (or that they should be sustained)... not so much.

You mean 1997 (capital gain taxes, of course) And no, in 1194 there was no bubble to tax. Deficits would shrink in the entire nineties from 1994 on.

But you are shifting the goalposts. Of course there is a limit to a government surplus. But that isn't an argument against higher taxes long-term to balance the budget. Furthermore prior to the start of the last crisis some countries - sweden, canada - had a surplus years in a row.

If your economy is growing in nominal terms it will need more high-powered money, unless you want your financial system to become brittle from increasing leverage.

There is precisely one way to inject high-powered money into the economy: Sovereign deficits. So on average over the long run, the sovereign should run deficits.

The fact that you should sometimes run surpluses during the boom part of the business cycle does not change the fact that the sovereign has to be in the red on a cycle-averaged basis, any more than a cold summer disproves global warming.

If you're talking short-run, then attempting to run surpluses is counterindicated at the moment. If you're talking long-run, then surpluses are wrong-headed, full stop.

(also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is a term relating to (but not being equivalent to) the money supply (or money stock), the amount of money in the economy. The monetary base is highly liquid money that consists of coins, paper money (both as bank vault cash and as currency circulating in the public), and commercial banks' reserves with the central bank.

Furthermore prior to the start of the last crisis some countries - sweden, canada - had a surplus years in a row.

Sweden is running a surplus by means of a trade surplus, sustained by keeping wages from following productivity. It is one way to slowly race the working class to the bottom, but it can not be ran by many contestants at the same time as someone has to have a trade deficit for someone else to have a trade surplus.

And just like in Germany, the main culprits are the labour unions, who accept very low salary increases just because their members have recieved big increases in disposable income due to tax cuts aimed at the middle class. I certainly support these tax cuts, but I don't support our useless labour unions rolling over on their backs. With an union membership rate of 80%, they don't need to do that.

These reminds me of a policy taken by the soc dems here in Sweden back in 1990. All salaries, prices, dividends and so on were frozen. It wasn't very popular or successful back then. But the wage restraint of the responsible labour unions during the crisis made certain sense then, during a national fiscal crisis, austerity, floating exchange rate and an export boom. Today it makes no sense at all... except in the periphery countries which do not have competitive wages compared to either the core or RoW! So I actually applaud periphery labour unions in showing wage restraint. The periphery countries had wage inflation much faster than productivity growth, which taken together with the fixed exchange rate of the euro, is what got us here in the first place.

The periphery countries had wage inflation much faster than productivity growth, which taken together with the fixed exchange rate of the euro, is what got us here in the first place.

Um, what got us here in the first place was that the periphery financed its consumption though lending from the core. There was a massive private debt and asset price bubble, not a gross increase in profits and wages in the periphery. And a lot of inflation, with all this debt and asset price money slushing around.

Of the three relevant labour unions in Sweden, the two smaller ones are politically independent while the big and strong one is essentially a part of the opposition Social democratic party. Or rather, the social democratic party is more like the political wing of the labour union, LO. So I fail to see why labour unions would feel any loyalty to the current centre-right government. If there is any example of the labour union feeling a greater loyalty to the (soc dem) party than its members, it's in their absurd resistance to the series of tax cuts which have been very profitable to their members. So what they should have done: support the tax cuts, support higher wages. What they did do: oppose tax cuts, oppose higher wages. Brilliant people, really.

I see it as NAIRU-policy working. Keep an army of unemployed and make sure to harass them sufficiently and the unions will act to keep their members from being umeployed rather then increased wages. Unions with a minimal unemployment among its members are still good at delivering pay increases. Of course, that is mainly unions for high-qualified personel and thus small unions, like for example the doctors union.

So you assume a crisis lasting another ten years, ending in 2021? And as you should know, the seventies, for all the cries about stagflation, were a decade of considerable growth.

Jake,

I do know that in five years or in ten years governments must still be funded and a welfare state will be probably more necessary then now. So your argument there is a crisis so shut up about taxes is not very convincing.
And I don't think europe is doomed, to use an old but forgotten slogan of this blog.

I do know that in five years or in ten years governments must still be funded

No, actually they mustn't.

Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes.

Taxes take away purchasing power from the private sector, so that it does not create scarcities, and slows or prevents the concentration of financial wealth with a few oligarchs.

You need taxes because you don't want oligarchs, not because you need them to "fund" government activities.

So your argument there is a crisis so shut up about taxes is not very convincing.

That's not my argument. My argument is that there is a crisis so you should shut up about sovereign surpluses. I am all in favour of taxing more to spend more. I am all in favour of taxing oligarchs to cut them down to size. But I consider it industrial-grade insanity to tax more in a futile attempt to hit a meaningless Grief and Stupidity Pact target based on cargo cult economics.

At some point we might stop talking past each other, though that seems unlikely.

What seems clear is that what Jake and I (but not only us) view as structural, political and economic problems, don't seem like really existing problems to you at all. So it is pretty pointless discussing policy at any level. Before we can talk about solutions we'd better agree on what problems we're supposed to be solving.

But from my point of view, the problems that are there cannot actually be solved within the institutional framework the EU has constructed, with the economic conventional wisdom of the people in charge or likely to be in charge (which is, from the point of view of conventional wisdom, pretty much self-perpetuating regardless of who wins elections). The drive to austerity demonstrates this - it's the only politically and institutionally possible policy in the EU right now, and it is already having disastrous consequences.

The Eurozone rules, enshrined in the Maastricht Treaty (now part of the Lisbon Treaty), explicitly bar the ECB from giving credit to public entities or buying their bonds. This, quite simply, means the Eurozone member states now operate as local/regional governments under them used to. Lacking funding from a supranational entity since the European Union does not have its own fiscal resources, all states can rely on is their own tax income and they must run balanced budgets like a private firm or a local government in order to retain access to private credit. In the Eurozone, therefore, the State must be run like a private firm. What used to be a political slogan is now the only way to function consistently with the institutional framework. Even the Social Democrats admit it and propagate it.

But as usual your linked blog post (very self-referential) is off topic.

The ECB is a part of the european government; but hardly the only one. There is the commission, the parliament, the council, the court. The ECB is not even the most powerful part: The council is equal in power, the court more powerful.

So if the EU is sovereign and I think it is, the ECB is one aspect of it. Not more or less.

The discussions before the crisis illustrated how little had been done to repair economic fundamentals. The European Central Bank's vehement opposition to what is essential to all capitalist economies - the restructuring of failed or insolvent entities' debt - is evidence of the continuing fragility of the Western banking system.

The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a "credit event," which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil. But, if that is a real fear for the ECB - if it is not merely acting on behalf of private lenders - surely it should have demanded that the banks have more capital.

...

Indeed, the most curious aspect of the ECB's position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event. The whole point of restructuring was to discharge debt and make the remainder more manageable. If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable.

This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least "cognitively") by the banks that they are supposed to regulate.

The ECB is a part of the european government; but hardly the only one. There is the commission, the parliament, the council, the court. The ECB is not even the most powerful part: The council is equal in power, the court more powerful.

The ECB is not subject to oversight from either. Another piece of obvious and manifest insanity that was instituted at the insistence of Helmut Kohl and the BuBa.

And the ECBuBa isn't subject to any meaningful oversight from any court of law. Central bank "independence," remember? Will you at least concede that this is a stupid doctrine that needs to be killed dead and exorcised with garlic and holy water?

Sure, if Trichet commits embezzlement or rapes his secretary, he might be prosecuted (or maybe not - bankers have done worse and walked away in recent times). That does not mean that the courts can in any meaningful way provide oversight and policy direction to the ECBuBa (nor should they - that should be Parliament's job, through the Commission).

But you got me there: The executive board is indeed appointed by the council, not the governments. They even use qualified majority voting.
(I was thinking of the way the commission and court are appointed)

The rest of the governing council is indeed appointed by national governments, namely the heads of the central banks.

And who can determine the personal of another institution has power over that institution.

And if the ECB is ever in a legal dispute, the European Court of Justice will decide. The court is probably the most powerful european institution and if you don't even know this, you have no business commenting on the EU.

b) will you at least grant that the ECB is the ECB and not the Bundesbank?

c) will you at least admit that the national governments and the council determine the composition of the governing council of the ECB? Giving the federal republic about as much influence as larger german state had on the Bundesbank?

In most policy areas, yes. In economic policy, which is, after all, the area presently under discussion, no. There is no substantial judicial review of ECB policy decisions.

b) will you at least grant that the ECB is the ECB and not the Bundesbank?

De jure, certainly. De facto, I cannot point to a single material difference in policy before the past few days.

c) will you at least admit that the national governments and the council determine the composition of the governing council of the ECB?

Obviously, yes.

Giving the federal republic about as much influence as larger german state had on the Bundesbank?

a) That does not follow from the composition of the board.

b) The BuBa always was a state-within-the-state in Germany, so pointing out that the German government fails to control the BuBa representatives to the ECB board hardly proves that the BuBa is not still a cancerous state-within-the-state.

Now, do you or do you not believe that inflation targeting and central bank independence are moronic policies? Do you or do you not believe that states should be forced to pay interest on their own currency? I'd really like to know if we're even speaking the same language here.

Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes.

That is very much a minority position.

Not among economists. Although the cargo cultists of the neoclassical tradition (including New "Keynesians" like our friend Bofinger) claim that "unfunded" spending will inevitably lead to inflation. But then, they are the same people who think that everybody can be a net exporter.

And please don't make up my position for me: I never said anything about surpluses. I said balance and that was long-term balance.

That comes to the same thing: Long-term balance implies zero nominal long-run growth in the national asset base. This is very likely to prove unstable under current institutional arrangements. In fact, if the economy grows in real terms it will be deflationary, which is proven beyond any sane doubt to be unstable under present institutional arrangements.

Alternatively, one can imagine sustained growth under a balanced budget scenario. Since the only way to create new money (in the sense that most people understand the term, which is to say high-powered money) is to deficit spend, sustained growth under long-run budget balance means that the volume of government-issued money in the economy will approach zero as time goes on.

We tried that in the 19th century. That experiment is the reason we have central banks these days.

Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority. Furthermore you seem to confuse the national asset stock with the national debt, a central bank with a fiscal deficit, monetary growth with a deficit, and so on. In this cause a balanced budget over the cycle would indeed be wrong, but I don't share your assumptions

Petty.
But you will be delighted: Most of them are to my right, think like you in nationalistic term, swallow right-wing myths about the evil seventies and like deregulation and low corporate taxes. And don't think much of Bofinger. Just your sort of people.

You're very fond of calling other people "nationalistic". Reading your commentary - and your apparently instinctive bristling whenever "Germany" is criticised - it might seem to a reader that you're projecting a little.

There are two distinct but related problems. The first is that the EU as currently constituted lacks an investor of last resort. The second is that it lacks any means to ensure that internal current accounts imbalances do not become a political problem.

There is a variety of possible reforms that would solve these problems. A European treasury not subject to silly "debt brakes" would solve both problems, but may be politically unpalatable. Repealing the GSP and Art. 123 would solve the investor of last resort problem, but not (necessarily) the current accounts imbalances. A Bancor-type arrangement would solve the internal current accounts problem (or rather, signify political acceptance of the existence of otherwise unsustainable imbalances), but would not solve the problem that the GSP circumscribes the states' ability to perform investor of last resort functions.

Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.

Finally, the physical economy of Europe (in particular the periphery) has the problem that thirty years of neoliberal brain rot (twenty in the case of Eastern Europe, but with much weaker countervailing pressures) have rendered large swathes of Europe into a wasteland, industrially speaking.

Bingo.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

It doesn't matter if the debts are measured in Euros, DMs, Pesos, or the soon to be offered New Mexico Tamale. If the people who owe the money can't make money to pay it off, they don't have the money to pay it off, thus, they can't pay it off.

Maybe I'm the dumbest m/f'er on the planet, but this seems Real Simple. To me.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

You don't think that the fact that central banks do not create new money - they merely exchange existing money for other forms of money with different term structures - has any bearing on the ability of the central bank to compensate for a total withdrawal of all sovereign money creation?

By the same token, under scheme 2, an expansion of reserves in excess of any requirement does not give banks more resources to expand lending. It only changes the composition of liquid assets of the banking system. Given the very high substitutability between bank reserves and other government assets held for liquidity purposes, the impact can be marginal at best. This is true in both normal and also in stress conditions. Importantly, excess reserves do not represent idle resources nor should they be viewed as somehow undesired by banks (again, recall that our notion of excess refers to holdings above minimum requirements). When the opportunity cost of excess reserves is zero, either because they are remunerated at the policy rate or the latter reaches the zero lower bound, they simply represent a form of liquid asset for banks.

This paragraph says two things. The first thing it says is that everything Bofinger thinks he knows about banks, banking and money is wrong.

The second, and for the purposes of our discussion, more important, is that the amount of base money in the system is irrelevant to the amount of bank lending, because the central bank always has the option to remunerate excess reserves at the policy rate, or extend rediscount facilities to banks that fail to meet liquidity requirements.

In other words, bank lending is equity constrained, not liquidity constrained. And since the central bank can not provide new equity (unless it is prepared to take equity risk onto its books, something you generally do not want your central bank to do, for a whole host of excellent reasons), the central bank can not affect the volume of lending, except by tightening and relaxing solvency requirements (something you definitely do not want to do).

Absent cash-for-trash programmes by central banks, private sector equity can come from precisely three places, as a matter of simple accounting identity: Private sector physical investment in excess of physical deterioration of the capital plant. A net foreign surplus. And government deficit spending.

Now, unless you wish to postulate that every country can run a foreign surplus (in which case you may want to look into repealing the rules of addition and subtraction), this means that sustainable private sector equity increases are equal to net expansion of capital plant plus sovereign deficit. Give or take maybe half a percent of the GDP of the countries you trade with, as a maximum sustainable trade imbalance.

Running a balanced budget, a responsible central bank rediscount policy, and balanced foreign accounts means that, asymptotically, the private sector's net financial position is zero. That is, the private sector will be unable to save up any high powered money in excess of whatever debt other parts of the private sector may owe the sovereign at any given time.

Physical deterioration enters into it because private sector equity is equal to the total value of the physical plant, minus the net foreign debt, plus the net public debt.

Absent persistent fiscal deficits and unsustainable foreign positions, the private sector will still have equity (Robinson Crusoe can still stockpile coconuts). It just won't have any net financial position (Robinson Crusoe can't stockpile pound sterling).

Since the private sector usually wants to stockpile financial assets (particularly sovereign financial assets), to provide a cushion against future expenses in the only asset class that is guaranteed by law to cover certain types of expenses, not allowing it to obtain a net financial position is usually Bad.

Well yes. If you define all other economists, including Bofinger or Krugman as cargo-cultists, leaving only the members of your sect as economists, then you have majority.

But Krugman is an orthodox economist ~ the New Keynesians add some wrinkles to allow scope for active intervention "in the short run", but once the short run stickness has worked itself out, its the same basic model.

If that long run model is excluded, then all of its users are excluded in terms of their conclusions drawn from that model, irrespective of how much we may like their political views and their views of things when they do not rely on the falsified mainstream model.

And excluding that single model clearly does not limit the balance to a single model. There are a range of post keynesians, institutionalists, structuralists, a selection among radical political economists, general systems economics, and a number of other approaches not excluded by ruling out the repeatedly falsified long term model of the mainstream as being non-scientific due to its adherence to a repeatedly falsified long run model.

Keep him in the short run, and he's free to make sensible policy recommendations. Stretch it out to the long run, and his model starts interfering. This is where the absurdity of the "intertemporal government budget constraint" enters in.

The MMT'ers are right when they talk about the financial side of things. But I find that they sometimes get so caught up in debunking financial BS that they pay too little attention to the needs of the physical economy.

In particular, a few of them argue that the US' foreign balance is of no particular concern since its import costs are all denominated in US$. I disagree with that position, because the US' foreign balance position means that if other people start demanding hard currency for their stuff, they risk cutting off the flow of goods and services on which the American society depends to be in a state of not-revolution. Since I rather like my society to be in a state of not-revolution, and since I assume that this disposition is shared by most well-fed, reasonably affluent people, knowing that my society's continued being in a state of not-revolution depended on the largess of foreign powers with possibly divergent geopolitical interests...

The phrase that Bill Mitchell uses is, "so long as people accept the US dollar, ...", without delving into how long that might be and under what terms.

Which is true as far as it goes, and that is what you want from a theory on an aspect of the economy. After all, the problem with the underlying theory that Krugman uses is that its a closed model independent of money, and so the premise that money is neutral over the long term is built into the underlying logic of the model, entirely immune to falsification by empirical evidence. Grand Theory of Everything economic models have to date ended up being Grand Theory of Nothing In Particular models, running on false equivalences between the terms of the model and the actual phenomena observed in the real world.

I don't quarrel with his modeling approach. I just think that when he is formulating policy proposals, he should pay a little more attention to possible scenarios for other people beginning to not accept dollars than I usually see in them.

Of course, I realise that he's busy debunking sky-is-gonna-fall scaremongering about the dollar collapsing due to the sovereign deficit - which is entirely the wrong sort of deficit to cause a dollar collapse. So perhaps it is simply that he does not want to open himself to "gotcha" games by quote miners.

... accepting the US dollar. The terms of trade dropping, sure, but a floating exchange rate most commonly melts down when there is substantial debt denominated in foreign currency, and since the US is not in that position, a slide in the exchange rate without a meltdown would ensure that people keep accepting the US$.

How much disruption is caused if the US dollar drops in value, say, by 50% on a trade weighted basis ... and how much disruption is caused if the US$ is not accepted as payment ... are two categorically different questions.

In the latter case, you are talking about 2/3 of US petroleum supply no longer arriving, except on barter terms or by diverting funds from exports that have earned hard currency.

If you're comfortable with "jobless recoveries" then you can have "considerable economic growth" while a large number of people experience considerable economic pain. Stagflation was not about stagnation in economic growth but about high inflation with high unemployment.

I am not sure, but wasn't unemployment too lower in the seventies compared to the eighties? Wasn't the term jobless recovery invented in 1991?
Anyway there was no permanent ten year crisis in the seventies.

Long-run? Only if your economy is on a stagnant or negative nominal growth path. In a nominally growing economy, the sovereign should run moderate cycle-averaged deficits to accommodate the private sector's need for sovereign securities.

Short-run? Obviously, during a bubble you should tax until the bubble stops. Which means that you may be running a surplus for a while. But if you have bubbles on a regular basis then You're Doing It Wrong.

"The first law about Germany is that they are always wrong, like the Americans are for the French," says Gérard Errera, former secretary-general of the French foreign ministry. "If they are assertive, they are accused of building the Fourth Reich. If they are against war in Libya, they are useless."

But no in that they do not want a fourth reich. Do german bankers want to run the continent ? Of course, but all bankers want to be in control. The guys in the Bank of England and the French equivalent are probably grinding their teeth in jealousy that they can't set the rules for the impoverishment and plundering of europe.

In conclusion, what has been written and quoted on ET: Germany does not want a fourth Reich (but Croatia might), German bankers want to be in charge like all bankers want to (and French and British bankers are jealous as hell), and German foreign policy is always subjected to "damned if you don't and dammned if you do".

Since last month, Paris based daily "Le Monde" has been publishing a 'Summer Series': "Terminus pour l'euro" (End of the line for the Euro), a political fiction set in the summer of 2012 after N.Sarkozy's re-election as French president, defeating Marine Le Pen (in that fictional universe, apparently, Socialist candidates do not survive DSK downfall and fail to make it past the election's first round).

The original series is behind Le Monde's paywall, but Presseurop has started publishing it in several languages. There's the usual shroud of mystery: nobody knows who's hiding behind the author's nom de plume Philae, and also some of the recent events seem to have caught up with the story:

On Sunday 6 May, 2012. Nicolas Sarkozy had just been re-elected to the French presidency, winning 69.3% of the vote to defeat the Front National (FN) leader Marine Le Pen.

However, the 10pm meeting for party bigwigs in the headquarters of Sarkozy's party, the Union pour un mouvement populaire (UMP), was anything but festive. General elections were only a month away, and all the signs pointed to a massive surge in support for the socialists and the FN. It was hard to imagine a more bitter victory.

Flanked by his two bodyguards, the US ambassador Charles Rivkin cut a path through the crowd to the president. No one was surprised when the two men retreated into a corner for a moment of private conversation.

An hour later, at a meeting of his closest associates, the president took a folded A4 page from his pocket and silently placed it on the table. In the dramatic pause that ensued, all eyes were on the blurred 15cm by 9cm photograph of a portrait of Konrad Adenauer against the backdrop of the angular forms of the Federal Chancellery.

"Gentlemen, allow me to present the new Deutschmark. Several million of these bills will soon be stockpiled in the warehouses of a Mecklemburg printworks. Ambassador Rivkin has confirmed the story: the Germans are going to print their own paper." An icy silence descended on the room, which was eventually broken by the president.

Parochial: indeed, it's a typical product of the small Paris-based political-journalistic "microcosm" way of thinking: Paris is a village, after all.

Or course, whoever has written this (there are speculations it could be Bruno Le Maire, Minister of Agriculture in the Sarkozy government) doesn't know jack about domestic German politics. But hey, let's not that get in the way of a good story.

The interesting point here is what this story is telling about the French intelligentsia current state of mind and their obsession about Germany's purported isolationism (that would leave France behind).